Business Banking

You will need a dedicated account if you set up in business but that can bring its own rewards, as chris dighton discovers

Opening a business account is very different to having one for your own private banking.

First, the number of transactions is likely to be far higher; secondly the way it works will be different – mainly because the cash flow is likely to be far more variable. Then there is the small matter of policing it.

Let’s face it: everything you do in business revolves around money. This money needs to be identifiable at every stage of the transaction. Opening a business bank account is the simplest way to achieve accountability and provide a good degree of transparency in your business dealings to allow government departments, creditors and auditors to accurately assess your business.

A business account will also give you credibility as your bank has, to a degree, assessed and accepted your business proposal.

The good news is that the success of the banks, their profits – a quite staggering £750 million – has led to a government initiative that has forced the big banks to offer all small businesses interest accounts at 2.5 per cent below the bank base rate, or an account that offers free transaction charges.

With a small business it is probably more prudent to look at charges as opposed to interest rates. Whatever your bank balance is, small business accounts will always attract charges for one reason or another.

If you are a sole trader, open a current account that will have your name and trading style, for example, Bob Brown T/A Brown Business Services (T/A means ‘trading as’). Having a business name will give you a more professional look, and will also allow you to ask for cheques to be written in your business name only i.e. ‘Brown Business Systems’.

If you have created a limited company you will want to open an account in the name of, say, ‘Brown Business Services Limited’. You will need to have your limited company set up before your visit to the bank.

Your current bank is not necessarily the best bank to open your account with. There are a few reasons for this: banks offer a varying degree of business start-up accounts; some have no charges for two years, Internet banking, an instant cash card, 24 hour availability etc. Also, keeping your business life away from your personal life will ensure that your bank is not in total control of your finances, and a bank that does not have you using all of its products is very keen to offer you the best deals.

In the initial free period, you may get a choice of monthly statements, and some may allow free weekly or fortnightly statements. Whatever they offer for free, if it is not weekly, then it’s not enough. It is better to pay extra (£1 to £2 per month) than to estimate from month to month as you wait for your statement.

No bank allows free periods for penalty payments and only experienced bookkeepers can survive with monthly statements.

If you are PC literate and you feel confident enough to use and understand on-line banking it has to be a solid choice, but do look at the points listed in the box on the left.

The British Bankers Association (BBA) says people should speak to their own bank first about a business account but advise that they compare what’s on offer from at least three different banks.

‘There is no such thing as a typical small business,’ says a spokesman. ‘Shop around to see what the banks have on offer, how closely each matches your needs and how much they will charge for operating your account, and make sure you compare like with like.’

There are a whole range of services and charges that are unique to business accounts and they often come as a surprise to people venturing down the self-employed route.

Some emphasise on-going advice and consultancy services and appoint individual business advisers in branches – often vital for someone taking their first tentative steps into self-employment.

As far as the costs of business accounts go, there are plenty – fixed fees for running accounts and even charges per transaction are common. Some are charged monthly, some quarterly, and the level of charge often differs depending upon the turnover of a business.

‘As a rule of thumb, the greater the amount of cash handled and the greater the volume of cheques passing through your account the more you will pay in charges,’ adds the BBA. In the case of start-ups, some charges may be waived while your new business is finding its feet. A number of banks offer free basic banking for the first 12 to 18 months. The catch is that it may only apply if the customer has their personal account with the same bank.

Other things to consider are the cost of overdrafts and loans and whether the account pays interest.
The importance of finding the right business account cannot be over- emphasised. Each year, many of the 400,000 or so start-ups choose a business account with any old bank, usually where the owner has his or her personal bank account. About a tenth of these businesses close within a year, and only around half are still trading after four years.

Amazingly, most of the UK’s small businesses have never shopped around to find better tariffs, charges and interest rates. In fact, according to the Institute of Directors, less than a third of firms (31 per cent) with up to 20 employees have switched banks in the last five years. However, bigger businesses were much more likely to switch, with 54 per cent of businesses with 21 to 100 workers changing banks during the same period.

That’s a shame because, according to the Banking Liaison Group, four out of five small businesses are paying too much in banking charges.

Too often there is a sense of misplaced loyalty, but do bear in mind that you shop around for other suppliers, so why not shop around for a bank account that suits the needs of your business? And don’t worry too much about ditching a long-term relationship with your bank. When the going gets tough, banks are far more interested in your current financial situation than in the length of time that you’ve banked with them.